Devon purchased a small business from Art on August 30, 2023, and paid the following amounts for the business: Line Item Description Amount Fixed assets $170,000 Goodwill 50,000 Covenant not to compete 20,000 Total $240,000 What amount can Devon deduct on his 2023 tax return as Section 197 intangible amortization?
Under U.S. tax law, Section 197 intangibles are certain types of intangible assets acquired in connection with the purchase of a business that are amortizable over a 15-year period, regardless of their actual useful life. These intangibles include goodwill and covenants not to compete, among others. Based on the information provided, Devon has acquired $50,000 in goodwill and a $20,000 covenant not to compete, both of which are Section 197 intangibles. The fixed assets are not Section 197 intangibles and are subject to different depreciation rules. To calculate the amortization for the 2023 tax year, Devon would amortize the Section 197 intangibles over 15 years (180 months) starting with the month of acquisition. Since the business was purchased on August 30, 2023, Devon can amortize the intangibles for the full month of September through December, which is 4 months of the 2023 tax year. The annual amortization for each intangible would be: Goodwill: $50,000 / 180 months = $277.78 per month Covenant not to compete: $20,000 / 180 months = $111.11 per month Total monthly amortization for both intangibles: $277.78 + $111.11 = $388.89 For 4 months in 2023, the total amortization deduction would be: $388.
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